Singapore —
Business with China is improving for South Korea's Lotte Chemical after a missile defense controversy almost derailed polymer exports to its major customers, the company's General Director K. S. Park said late Monday.

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"We don't know exactly when this situation will end, but the tendency of Chinese banks to deny letters of credit to our clients is decreasing," Park said in an exclusive interview with S&P Global Platts.

THAAD deploys to Republic of Korea. (Courtesy photo, free of known copyright restrictions under U.S. copyright law)

Lotte Chemical's parent company, South Korean conglomerate Lotte Group, agreed to a land swap with the South Korean government in late February to house the US' Terminal High Altitude Area Defense system or THAAD. The ensuing political backlash was seen as impacting the Lotte Group's business relationships in China.

Trading in Lotte Chemical's polymer cargoes stalled after the land swap, with Chinese banks denying credit to its customers, impacting February and March polymer cargoes.

"As traders we don't want to incur risk buying Lotte cargo -- what if the cargo is refused entry at port?" a major Chinese trader said, adding Lotte's products were higher quality than China's coal-based polypropylene.

Park said he had heard such concerns in the market, but believed the likelihood of a cargo being refused entry was low, noting China's regulations for Lotte cargoes have not changed.

"Even if the possibility is low, I think we have to prepare for certain actions from China and already have contingency plans," he said.

"The very easy approach for our company will be to diversify to Southeast Asia, Africa and Europe."

LOOKING TO DIVERSIFY

Lotte sells about 30% of its PP to the Chinese market. Another Lotte Chemical source estimated the company's PP homopolymer exports to China at 10,000 mt/month.

"Vietnam is the main option for diversifying our cargo; Indonesia and Bangladesh are the next best options. In the case of Indonesia, from this year it is duty free for PP Copolymer grades, so we will try to increase export volumes of [that grade]," Park said.

"In the EU, we already have a duty-free situation, but unfortunately last year demand was not good and we could not increase volumes. This year, the economic situation in the EU getting better, so we are looking to increase specialty polymer grade [exports] to these countries," Park said.

Lotte Chemical will focus on specialty grades rather than competing head-to-head on commodity grades with Middle Eastern producers, he added.

However, other industry sources said there were challenges for Lotte Chemical in looking to reduce its reliance on China, including duty limitations in Southeast Asia and strong competition from the Middle East.

"If Lotte Korea comes to Southeast Asia, import duties in countries like Indonesia and Malaysia will shut them out, although selling to Vietnam is still [an option]," a Lotte Titan trader said, citing South Korea's duty-free status in Vietnam.

Should Lotte Chemical opt to target markets in Europe, Turkey and Africa, competition from Middle Eastern producers would be fierce as they had both production cost and logistical advantages, a Middle East distributor said.

Lotte Chemical is a major South Korean polymer producer with more than 1 million mt/year of PP capacity and 1 million mt/year of polyethylene capacity of various grades across plants in Daesan and Yeosu.

--Yi-Jeng Huang, yi.jeng.huang@spglobal.com

--Edited by Wendy Wells, wendy.wells@spglobal.com

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